While the classic disruptive innovation theory, as presented in The Innovator’s Dilemma, does an incredible job to describe the overall effects of disruption, it does not delve into the reasons why incumbents fail to respond. Here we’ll look at what really causes this “Incumbent’s Dilemma”, using this 5C framework that describes the barriers incumbents face — even after recognizing the external threat.
Disruptive innovation theory in a nutshell
The basic premise of The Innovator’s Dilemma is that an incumbent fails to recognize an up and coming disruptor, who is pursuing an “undesirable” customer, with a “low-end” product. Then, when the incumbent isn’t paying attention, this disruptor sneaks up and captures the low-end of the market, which they use as a beachhead to eroding the incumbent’s share. At that point, it’s too late for the incumbent to adequately respond, and the market quickly tips in favor of the disruptor. For more you can also refer to a recent “tweetstorm” from @pmarca.
Why incumbents (really) fail to recognize threats
While this is all well & good, it paints the incumbent as having its head in the sand, which is incomplete. A recent post by Andreessen Horowitz partner Steve Sinofsky, does an incredible job diving into the nuanced picture as to why incumbents fail to recognize threats from disruptors early enough.
But what happens when they do recognize the threat, and still fail?
But to say big companies are arrogant, or ignorant, is still shortsighted. I can recall walking around Microsoft campus in the late 90s and witnessing innovations like smartphone operating systems (like iOS), web-based document creation (like Google Docs), in car systems (like CarPlay), compelling UIs, and many other projects that never saw the light of day. Similarly, there is the well documented story of Kodak, which developed the first digital camera in 1975, only to see its business disrupted by it.
So, the real question is why do these projects die on the vine?
Here, I’d like to examine why incumbents, even after recognizing — and even acting upon — these threats, still fail to successfully execute. I’ve summarized some of the main drivers in the following five “Cs” below.
1) Core revenue streams
An incumbent’s primary focus is often to protect its core revenue streams. While the new solution may have greater long-term potential, the reality is that the company’s bills are paid by the existing one. As such, it’s difficult to sacrifice resources from the existing to the new, likely resulting in the new solution to be treated more like an add-on, rather than one designed to ultimately cannibalize and disrupt the core business.
Additional difficulties can arise from the transition from one business to another, where the core business can take a “dip” as the new ramps up. This can be troubling to existing investors, especially in the public markets.
2) Comfort & complacency
The second issue is more of a human issue than a structural one. When an existing business is still growing at a steady (even if slow) rate, there is little sense of urgency to act with fervor. Conversely at startups where the fate of the company, and the livelihood of the founders, is on the line, there exists greater impetus to act swiftly and decisively.
What can also exacerbate this is the fact that there isn’t a vocal majority of existing customers asking for the new capability. Most of your existing (and “best”) customers, will rarely recognize the need that the disruptor is filling, and thus lead you into a false sense of security.
3) Cost of doing business
Supporting an existing, revenue generating business creates a “legacy tax” on all new operations. This extra overhead stems from supporting existing customers, and maintaining ongoing operations.
This can be especially difficult if the new product has to subsume some (or all) of the functionality of the existing one, in that there is already a high bar that the new product must accomplish, and thus leading to longer development cycles, and higher costs.
Furthermore, when an established company launches a new product there is a higher expectation of quality, performance, and capability than from a new upstart — so what constitutes an “MVP” has greater expectations, and hence time to develop.
4) Controls over operations
In an existing market leader’s business, many operational controls are implemented to optimize the existing business, and to preserve its leadership position. This specialization is evident across the type of organizational structure as well as the tools, systems, processes, and procedures by which the company operates. Thus the new initiative struggles to operate by the same rules, which are setup to avoid failure, and drive predictability.
5) Culture & compensation
Unlike #2 where the existing business provides a sense of security, the issue here is that there is often a lack of knowledge and mindset on how to execute outside of the “way things are done” at the incumbent. Typically, people at the disruptor tend to do more with less, and have a “Move Fast and Break Things” approach. When the people executing the new venture have not lived in that type of environment before, nor may they have the proper individual incentives to do so, it’s difficult to achieve the desired results.
What’s the Incumbent’s Solution?
While these 5Cs present the challenges incumbents face in overcoming the inertia of their existing operations, they are not meant to prescribe specific solutions. At this point, I think it’s first important to recognize and acknowledge the 5Cs, as a first step to devising the plan that is best suited to the incumbent’s organization.